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State bank of India (SBI) home loan vs Housing development finance corporation (HDFC) Home loan – interest rate war is on!

It’s showdown time for the two biggies in the housing finance sector: SBI and HDFC. After the economic meltdown, most banks switched their attention from not-so-profitable commercial lending to retail lending, which have formed a sizeable part of their credit portfolio in the recent past. State Bank of India (SBI) was the frontrunner with its special 8 per cent home loan scheme till it was challenged by Housing Development Finance Corporation Ltd (HDFC). So what does HDFC offer to outdo SBI’s much-publicised scheme?

Highlights

HDFC offers new home loans at a fixed 8.25 per cent rate for the first three years

SBI loans are available at a fixed 8 per cent rate for the first year and 8.5 per cent for next two years

There is a marginal difference in the effective interest rates of both the schemes

HDFC’s new home loan product comes at a fixed rate of 8.25 per cent per annum for the first three years (up to March 2012). However, these rates are applicable for loans up to Rs. 30 lakh and a maximum tenure of 20 years, and not on the other two slabs, i.e., loans between Rs. 30 lakh and Rs. 50 lakh; and Rs. 50 lakh and above. From fourth year onwards, HDFC will charge a floating rate of 5 per cent below its retail prime lending rate (RPLR) – the institution’s benchmark rate – on the loan. Currently, the RPLR is 13.75 per cent. This rate is available under special festive offer to all new home loan customers who apply before Jan. 31, 2010 and take at least part disbursement before March 31, 2010. NRIs and PIOs will also be benefitted from the festive offer rate.

SBI vs HDFC
HDFC’s new loan offer is in direct competition with SBI’s Easy Loan scheme, but it is difficult to guess the winner. Now let us have a rundown on SBI’s Easy Loan scheme. Loans under this scheme are offered at a fixed rate of 8 per cent for the first year, 8.5 per cent the next two years and thereafter at a floating rate of 2.75 per cent below its benchmark rate (SBAR, State Bank Advance Rate) or at a fixed rate of 1.25 per cent below SBAR. Currently, SBAR stands at 11.75 per cent. The comparative rates of both SBI and HDFC are given in Table 1. Recently, SBI extended its special loan offer till March 31, 2009 to maintain its credit growth target and build up retail portfolio in lieu of a slump in commercial lending.

Earlier, HDFC was averse to the idea of discounted rate; it even criticised SBI special home loan scheme. HDFC stressed the point that the teaser rates offered in the initial years could cause widespread defaults when rates surged in later years. So what made HDFC change its stance? It has reasoned that ample liquidity, improved operational efficiency and good quality portfolio have made the discounted rate possible for it. Whatever may be the reason, it is important to see whether borrowers will benefit from these new rates.

Analysis

We, at Rupeetalk, always try to provide fair understanding and impact of the special loan rates on customers (Read: SBI special home loan: A boon or bane?), and what effect they will have on their cash flows.

Here, we have analysed HDFC and SBI offers in terms of interests paid in the first three years, total interest paid and effective interest rate for the complete tenure (refer Table 2 and 3). In Table 2, we see that there is a marginal difference in the first 3-year interest components of both the lenders. However, in terms of total interest payments, HDFC scores over SBI; HDFC borrowers save Rs. 75,683 in interest compared to SBI borrowers. The effective interest rate in case of HDFC comes to 8.69 per cent compared to SBI’s 8.85 per cent.

However, in case of a Rs. 60-lakh loan (refer Table 3), interest component in the first 3 years varies considerably, i.e., 19.90 per cent and 22.34 per cent of the total interest paid for SBI and HDFC, respectively. If the borrower is looking to prepay his/her loan, SBI’s offer would be a good bet in this case. SBI also scores over HDFC in terms of total interest paid, and thus, the effective interest rate comes to 9.69 per cent for SBI in comparison to 9.78 per cent for HDFC. Here, HDFC borrowers end up paying Rs. 70,348 more than SBI borrowers.

No respite for existing customers

It is clear that these schemes are sales gimmick to lure new customers, for the banks have completely ignored their existing customers. These reduced floating rates are not applicable to the existing customers of both the schemes. In this condition, the existing customers can either renegotiate rates with their banks for a levelled interest rate or shift their loan to other lender for a better rate. Note that refinancing a loan may require a customer to pay prepayment penalty as high as 2 per cent.

Conclusion

The steady recovery of the Indian economy has spread cheer to almost every sector, and the real estate market is no exception. After going through a rough patch, it is regaining its composure. This is the time to buy a house for many, with the property prices coming down by 20-30 per cent and banks offering special rates to sell home loans and achieve their individual credit growth targets. SBI and HDFC, which control a sizeable portion of retail lending in India, are better placed to take advantage of these conditions with their special loan schemes. Both the festive rates seem to have marginal difference in terms of effective interest rates, however, borrowers are advised to read the fine print before closing a deal so that there won’t be any regrets later.

I strongly suggest anyone to go for Govt banks from my personal experience. In the short or long run they prove to be better.

While HDFC talks about the much touted transparency, they are hardly that. In Govt. banks as the RPLR comes down, our HLR (Home loan rate)rate is automatically adjusted. In HDFC one has to be hawk eyed and have to go to the HDFC bank, enquire and again give a charge and then it is revised down to a prefixed slab. If you do not enquire, do not expect the bank to send you communique on these schemes. Bad luck for you!!!!

Govt banks on the other hand revise it the day RBI announces a downward revision in RPLR. HDFC and other Pvt banks are off-course quick to revise it upwards when the RPLR goes up! Also on re-payment, the effect of repayment is immediate in Govt banks. I`am not too sure about this in HDFC.

I also suggest to have a compariso with other Govt banks such as Maharashtra bank, Syndicate bank(where I`am still having a good experience) etc.

One good incentive with HDFC bank loan is due to the practices of non-communication and Fast hike in interest rates, they provide you a very strong incentive to close the loans!! Some advantage this!!! HDFC staff are very efficient. This neeeds special mention as compared to Govt banks. But you hardly meet them once a year for tax declaratiopns which also can be done on-line these days.

I have taken Housing Loan from HDFC 7 months back. I want to shift the loan to SBI under easy Lona scheme. Now the Problem is HDFC is not accepting a letter from me authorising SBI person to collect original documents on payment of DD. Due to which SBI is not processing the takeover. Do any one has idea whether HDFC should accept the authority letter from me or SBI can takeover the loan without such letter. SBI is not taking anyother interim security from me.. pls suggest.

I recently came across HDFC, the largest private housing financiers in India advertising that their Cochin office had taken over some properties for non-repayment. The majority of the cases had total outstanding balances of less than Rs. 1.75 lakhs, to read from the advertisements. Considering that even a Cent of housing property in Ernakulam district is worth more than Rs. 2 lakhs, this seemed to be over enthusiasm for some reason on the part of the lenders.

It was seen that these loans had all been taken around 2002-2003 when the interest rates were around 7 or 8%. Within a few months however, rates began to climb. Currently, this particular lender charges 12.5%. The extra interest on each defaulted EMI is 18% additionally. The pathetic situation of the non-wilfully defaulting borrower can be imagined. The initial rosy interest rates offered are called Teasers; to tease the innocent public with!

In the current scenario, the borrower would have to again pay at least Rs. 5000/- extra per lakh for each year of the loan, to get his title deeds back in the end even if agreed instalments are regularly remitted. This is because interest has been raised to 1 ½ times arbitrarily after getting the borrower to sign for the loan at 7 to 8% interest. If it be a twenty year loan, he ends up paying Rs. 1 lakh additionally for each Rs. 1 lakh borrowed, over and above the originally agreed repayment. If three instalments are defaulted, the loan becomes an NPA and within 6 months of continued default, this lender moves in under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 [SARFAESI], no questions asked. This draconian law was put in place to hide and shift from bank officials, accountability of deliberate bad loans. The take-over of property draws attention away from official misdemeanours in processing, sanction and conduct of the bad loans. The fixing of NPA at the end of three months is even anti-Indian when we admit our slow pace of national life.

The RBI has laid down that a defaulting borrower should be advised in advance of the lenders’ intention of deeming him a wilful defaulter; his objections to it should be called for and heard. This is not done by the Company or for that matter, by most banks. It might be that the default is due to temporary issues like illness or loss of job. What the non-wilful defaulter receives out of the blue at the end of six months of default is a Notice telling him that his property would be taken over if he does not remit the entire dues and costs within 60 days. Till recently, the borrower had to first remit 75% of the dues if his petition against re-possessing was to be even admitted by Courts. Even now, the waiving or fixing of such remittance is left to the discretion of the Judge. While the Act requires the Notice to be issued only by an authorised officer of the financier, HDFC gets a top lawyer to issue it. The charges of Rs. 5000/- for that small notice is immediately loaded into the loan dues.

At the end of the 60 day period, the Company would make a request to the Collector. The lower officials would then be properly met by the Recovery agents of the Company and assistance of the Revenue and Police officials are immediately made available for possession of the house by the lender.

This procedure at the Collectorate is merely anti-people. Housing field or elsewhere, it is known that private banks and financiers falsify their accounts. Anyone that has been taken to Court by the new generation banks about a Personal Loan knows it. Huge hidden and coercive charges are loaded into the final dues position. The amount demanded in recovery is invariably very much more than is legally eligible. Nevertheless, at the Collectorate, no questions are asked and the Police and Revenue staff is enthusiastically released to the Recovery agents.

Ideally, the Collector should make independent enquiries of each case, call up the defaulter to hear him and only then move to the final catastrophe. It is from dearly held dwellings that the eviction based only on the statements of the often fraudulent lenders is to be done! And no Keralite would ever default on a housing or gold ornament loan unless it is his suicidal only option. No middle class borrower can fight the financier in Court because of the financial might of latter to get the costliest lawyers.

I enquired about why the final dues in the aforementioned cases were less than Rs. 1.75 lakhs and yet such drastic measures were employed. I was astounded to hear that the actual dues are even less! And this is how it happens.

RBI has instructed that if the dues are Rs. 1 lakh or less, coercive measures of recovery should not be used. Such dues are to be only settled on arbitration. To overcome this difficulty, the Company has ways of bringing the balance to above one lakh. The intended possession of the property is advertised in all the editions of the biggest newspaper of the Company’s choice. Advertising costs come to around Rs. 50000/-. Each demand call by the Recovery officials is charged to the borrower at a minimum of Rs. 750/- per visit. Expenses of recovery procedure at the government official levels are at least Rs. 25000/- and may go up to any amount. Thus even if the loan dues is only Rs. 20000/-, the amount claimed for recovery is easily boosted to above Rs.1 lakh. There is no mechanism anywhere to check costs of such recovery procedure. Neither government nor the law comes to the poor innocent defaulter’s aid. In the cases we talked about earlier, the actual dues were only around Rs. 75000/- to Rs. 90000/-.

It might be that the Company’s Recovery officers who engage the Recovery agents etc have vested interests. I was told that the same group of buyers purchase all the property put to auction by the Company, in different names. One might suspect some collusion here. The Recovery officers of Kochi told me that their NPA rate is 0.7% as against 0.8% of the Company’s national average and therefore, they do not care about customers’ difficulties. Their motive is to reduce their NPA rate further. They cannot be bothered about any social commitment. They advise the borrower to sell the property and offer to find buyers. Imagine a borrower in temporary difficulties being thus coerced into selling his 10 cents with house so that a Rs. 10000/- or Rs. 20000/- of overdues can be normalised in the Company’s books. They gloat over it that in the case of a KSEB employee of Angamaly with an overdues of Rs. 24000/-, intervention by even Sri. Oommen Chandy could not prevent them from seizing the 10 cents and house near Nedumbassery airport!

At least three fourths of all the houses built in Kerala during the past ten years, especially by the middle classes and NRIs, are mortgaged to companies like this and new generation banks. It is obvious that a predatory style is adopted by the financiers. If we do not move in to put in checks now itself, the consequences might be catastrophic.

The lender has rights to be repaid. At least in the housing sector however, a humane approach to recovery is not a sin. Lenders should be made to hear the borrowers as stipulated by RBI, before treating them as wilful defaulters. As said in the RBI’s handbook on NPAs, one is a wilful defaulter only if he has funds and yet, does not remit. The SARFAESI is not applicable to agriculture debts, dues below Rs One lakh; and to non-wilful defaulters as per the Act. This is so even for corporations with dues of Rs. 50 crores or above. An NRI or employee that loses a job or falls ill does not come under this category. The bankers and financiers do not however, take this into account. The procedure for treating such borrowers has also been stipulated by RBI. The lender should only re-structure such loans allowing the borrower more time or lesser instalment amounts. This is at least thought of by our lenders only in the case of very big borrowers to help them. And in the case of PSBs, a final assistance is always done to big borrowers by settling for a much lower amount than the dues. Often, the money thus given runs to crores. But not so, to middle class house owners with two or three lakh debts, trying to cling on to their only tangible asset!

Collectorates should hear the defaulter before acquiescing to the arbitrary requests of lenders to help them take over houses and evict the owners. They should if necessary, even intervene between the two parties so that emotional and other disasters do not occur. Any popular administration should do so.

Unfortunately, the media that has to consider advertisement revenues from big lenders often fail to highlight this situation. A covert meltdown therefore, awaits Kerala’s middle classes to whom a house of their own is the ultimate dream, only due to administrative and media apathy.